ZIPR looks like an interesting speculation at current prices ($3.40). ZIPR is one of the most popular online real estate sites, and the company runs a full-service residential real estate brokerage operation in 35 US locations. The positives as always are that the stock price is down significantly over the past five years, the company is still losing money, the balance sheet remains solid, almost no analysts follow the company, and yet evidence points to improving financials over the coming quarters.
Importantly, I don’t like ZIPR as a bet on residential real estate per se, since the outlook for residential real estate is I believe still quite poor, despite Paulson’s beliefs.
What interests me about ZIPR is two things: Growing non-transactional revenue which should lead to a higher relative valuation and the prospects for a huge financial upside surprise in the coming quarters which should bring in momentum/computer traders.
First some numbers, ZIPR market cap is about $70 million, but with $38 million in cash and no debt, the entire enterprise value is approximately $30 million. This is set against about $120 million in revenue, with about 40% gross margins.
This valuation seems extremely low to me, given the fact that ZIPR’s real estate website is one of the most visited real estate websites in the US. Part of the problem (of course another major problem is that the company is mismanaged from an expense standpoint, but that’s another post) is that ZIPR has not really monetized the website traffic with higher margin non-transactional advertising revenue. But this is changing, with the company’s non-transaction revenue more than doubling in Q1 2010. I believe that as the company focuses more on driving non-transaction revenue, the company’s financial situation can improve dramatically and the stock valuation should move higher to be more in line with that of non-public peers.
Furthermore, in terms of pure financial speculation, I found it interesting that during Q1, which was abysmal (another $6 million loss), the company again reiterated that EBITDA would be positive in 2010. As Q1 is generally the company’s slowest revenue quarter, and the highest quarter for operational expenses, the implication is that the numbers will improve dramatically in the quarters ahead if EBITDA will turn positive for the year. My estimates imply a significant improvement in Q2 and Q3, when the company should feel the full, lagging, financial benefits of the homebuyer tax credit. I believe the positive numbers will drive demand for the stock. Whether the improving numbers I expect are sustainable, is another issue, but given the short-term mentality on Wall Street,and the low valuation, I don’t believe sustainability is really a risk here at this point.
Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ZIPR. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.
